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Antitrust, competition and economic regulation quarterly newsletter

On 26 March 2014, an historic panel consisting of senior officials from the antitrust enforcement authorities of Africa, Brazil, and China presented to, and took questions from, a packed house of attorneys at the ABA Section of Antitrust Law’s Spring Meeting in Washington, DC (ABA Spring Meeting). This was the first time these emerging antitrust jurisdictions had been represented by such senior officials at an ABA Spring Meeting. The panel comprised Vinicius Marques de Carvalho, President of Brazil’s Conselho Administrativo de Defesa Econômica (CADE); George K. Lipimile, Director and Chief Executive Officer of the Competition Commission of the Common Market of Eastern and Southern Africa (COMESA); Li Qing, Deputy Director General of the Price Supervision and Anti-Monopoly Department of China’s National Development and Reform Commission (NDRC); and Zhao Yiqin, Deputy Director of the Anti-Monopoly Enforcement Division of the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of China’s State Administration for Industry and Commerce (SAIC). * Drawn from three key emerging jurisdictions from around the world, and representing three continents – Africa, Asia and South America – the enforcement officials spoke about the authorities they lead and the issues their authorities face as emerging antitrust regimes in a world of increasing globalization financially, commercially, and in terms of antitrust enforcement. ** Emerging economies and globalization Commentators cite many factors as contributing to the growth of so-called emerging economies relative to so-called developed economies. These include lower labour costs, rising productivity, improvements in transport and communication systems connecting emerging economies to global markets, a rising middle class, growth in world trade, and a decline in trade tariffs. It is estimated that the economies of the most prominent emerging markets, including Brazil, China, and India, have grown by about 600 percent since 1960 compared with 300 percent for the richer, more industrialized countries. Over the past 20 years, emerging markets’ share of world GDP, private consumption, investment and trade is estimated to have nearly doubled. In addition, “developing” economies are estimated to have attracted over half of the total global foreign direct investment in 2013; the share of foreign direct investment into “developed” countries has been in decline for some time. The U.S. remains the top destination in the world for foreign direct investment, with China (excluding Hong Kong) in second place. Brazil was 7 th , Mexico 12 th , and India 16 th in 2012 according to UNCTAD. Last year, China was reported to have become the biggest trader in goods, ahead of the U.S. for the first time in modern times. 1 Nonetheless, the U.S. continues to lead the world in the trade for services; China’s trade in services was less than half that of the U.S. in 2012, for example. Recently, the International Comparison Program hosted by the World Bank has forecast that China will overtake the U.S. as the largest overall economy in the world by the end of this year and not 2019, as previously forecast. Nevertheless, the world’s “rich” countries still account for 50 percent of global GDP while comprising only 17 percent of the world’s population. Globalization has also been an increasing feature of the international enforcement of antitrust law over the last couple of decades. The great interest in what the emerging jurisdiction enforcers from Africa, Brazil, and China had to say at the ABA Spring Meeting is clear evidence of this trend – a trend that shows every sign of continuing, and, indeed, of accelerating. The growth in the number of jurisdictions that have adopted antitrust laws in the last 20 years or so has been well-documented elsewhere. This article focuses on the jurisdictions that were represented on the ABA Spring Meeting panel. Brazil has substantially amended its antitrust law and institutional structure with effect from 2012, bringing about major changes to its previous regime. China’s Anti-Monopoly Law is five years old, although China first started to consider the adoption of an antitrust law regime and to study other jurisdictions’ regimes many years ago. The COMESA Competition 1 Some historians believe that China was the largest trading nation during the Qing dynasty which lasted from 1644 to 1912. * The panel was moderated by Rachel Brandenburger, Senior Advisor to Hogan Lovells US LLP, based in New York. Rachel is licensed as a foreign legal consultant in the State of New York and is admitted in England and Wales. ** The material in this article is drawn not only from the panel at the ABA Spring Meeting but also from other sources. ACER Quarterly January 2014 – May 2014 3 Commission was established in 2008, but became fully operational only in 2013. 2 The tendency to refer collectively to “emerging” antitrust jurisdictions suggests a greater homogeneity than in fact exists. In reality, there is considerable diversity in terms of the economic, social, political, historical, and cultural influences that affect the objectives and goals, as well as the institutional structures, laws and implementation of the antitrust laws and regimes in emerging jurisdictions, as is illustrated in the rest of this article. Brazil Brazil substantially amended its antitrust law and institutional enforcement structure resulting in major changes to its previous antitrust law regime. The new regime merged the Secretariat for Economic Defence (SDE) with the Administrative Council for Economic Defence (CADE) to create a single unified competition authority. The law also generally increased the financial and personnel resources for competition law enforcement and introduced a pre-merger control regime. These revisions did not occur in a vacuum; CADE analysed several antitrust regimes around the world, including the United States and European Union, before introducing the changes in Brazil. With regard to mergers, the changes have resulted in a significant acceleration of the review process. In 2005, the average length of proceedings was 252 days; today, CADE President Vinicius Marques de Carvalho told the ABA Spring Meeting, it is less than 30 days. Despite this positive development, there remain some concerns about the new merger regime, including the scope of the jurisdictional thresholds that are perceived by the international business community to be too far reaching. CADE also investigates non-merger cases involving both domestic and international companies, including both cartel and unilateral conduct cases. In 2013, CADE introduced a new regulation for the settlement of cartel investigations through cease and desist agreements and reductions in fines. CADE President Vinicius Marques de Carvalho told the ABA Spring Meeting that the new rules aim to improve settlement agreements 2 In addition, although a number of COMESA member states and other jurisdictions in Africa have had their own competition laws and regimes for longer, others have only recently adopted their own laws and regimes or are proposing to do so. and evidence collection. Specifically, applicants must confess participation in the antitrust infringement at issue and cooperate during the investigation to be eligible for the settlement procedure and fine reduction. There are four pre-defined discounts based on the degree of cooperation and order parties reach agreement with CADE: 1) 30-50% reduction of fine; 2) 25–40%; 3) up to 25%; and, 4) after closure of the investigation, up to 15%. CADE President Vinicius Marques de Carvalho also explained that this new system aims to increase parties’ incentives to seek leniency. So far, one case has been completed under the new system, with more than 10 more under review. With the new law and more resources, CADE has been increasingly active. For example, CADE has announced investigations into the alleged bid rigging of government tenders for medical supplies; fines in relation to cartels in the garbage collection and fire extinguisher industries, as well as the pharmacy sector; settlements in relation to cartel investigations in the air freight and international cable industries; and investigations into alleged abusive practices in the mobile, rail freight and ice cream sectors, as well as into Google search business. China China’s anti-monopoly regime includes three anti-monopoly authorities. The Ministry of Commerce (MOFCOM) is the authority that reviews mergers. The National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) have jurisdiction over price and non-price infringements, respectively, of the Anti-Monopoly Law (AML) involving horizontal agreements, vertical agreements, and abuse of dominance matters. 3 In the past two years, NDRC and SAIC have been initiating investigations with increased frequency and levying increasingly large fines against non-compliant parties. During that period, NDRC is reported to have concluded more than 30 cases and SAIC at least 12. The two agencies have investigated cases in a broad range of consumer-facing sectors, including construction, agriculture, consumer goods, insurance, pharmaceuticals, and automobiles. 3 MOFCOM, represented by Director General Shang Ming, participated in a separate panel dedicated to mergers at the ABA Spring Meeting.4 ACER Quarterly January 2014 – May 2014 The increased enforcement activity of the Chinese anti-monopoly authorities has triggered concerns about transparency, procedural fairness, resources, and timing on the part of the international businesses subject to the proceedings. NDRC At the ABA Spring Meeting, Deputy Director General Li Qing said that NDRC has strengthened its enforcement staffing since 2011 by adding 20 administrative staff in the central office and 160 enforcement staff throughout the provincial offices. She also said that NDRC now covers more than 20 sectors of the Chinese economy and that NDRC has taken recent enforcement action in relation to cartels, vertical restraints, abuse of dominance, and abuse of administrative monopolies. Those investigations have been against domestic and international companies, privately owned companies and state owned enterprises, and industry associations. In January 2013, NDRC took China’s first enforcement action against an international cartel. The agency imposed a penalty of RMB 353 million (approx. US$ 56.6 million) 4 against six international manufacturers (from Japan, South Korea, and Taiwan) of liquid crystal display, or LCD, flat panel displays. 5 The case was brought under China’s Price Law, because the LCD cartel operated prior to the adoption of the AML. NDRC is reported to have commented that, had the LCD cartel been operating following the introduction of the AML, the fines would have been significantly higher under the AML. NDRC has also launched a series of enforcement actions against restraints in vertical agreements between manufacturers and retailers, particularly with regard to resale price maintenance (RPM). Following an investigation into RPM practices in the automotive industry in 2012, NDRC levied penalties of RMB 247 million (approx. US$ 39.6 million) and RMB 202 million (approx. US$ 32.4 million) against two state-owned enterprises, Moutai and Wuliangye, for imposing vertical restraints in commercial agreements that included RPM clauses. NDRC has also investigated Chinese and international infant formula manufacturers in relation to RPM and vertical restraints. 4 The currency conversions in this article are estimated as of 5/12/2014. 5 The U.S. Department of Justice, the European Commission, and other international antitrust agencies have also investigated and sanctioned LCD manufacturers. NDRC levied fines totalling RMB 670 million (approx. US$107.4 million) on six of the manufacturers and granted full immunity to three manufacturers. Following the investigation, a number of the manufacturers in question are reported to have implemented significant price reductions for their products. In 2011, NDRC opened a high-profile investigation into two state-owned telecommunications companies for abusing their dominance in pricing discriminatingly wholesale access to their broadband networks. In that investigation, NDRC is reported to have accepted a three-year behavioural remedy. More recently, there has been an apparent focus on information technology and intellectual property corporations, including corporations that license patent technology for mobile devices and networks. It is reported that NDRC is investigating allegations that the chip manufacturer Qualcomm charges discriminatory patent licensing fees in China. The Qualcomm investigation comes on the heels of a reported investigation into InterDigital, which develops patent technologies for wireless devices and networks. SAIC Increased non-merger enforcement activity in China has not been limited to NDRC; SAIC has also increased its enforcement efforts. At the ABA Spring Meeting, Deputy Director Zhao Yiqin highlighted four features in particular. First, the total number of cases has increased significantly, with an annual increase of 58 percent. Second, the overall capability of the whole system has been improved. Third, the range of entities being investigated has grown, with more than 30 cases involving corporations spanning the building materials, insurance, telecoms, second-hand cars, tourism, and public utilities sectors. In particular, companies in the building materials, insurance, and public utilities sectors have been investigated for monopolistic activities. Fourth, SAIC has begun to publish case decisions as it attaches importance to transparency. To date, many of SAIC’s investigations have involved industry associations, particularly in the insurance and construction industries. In 2012, SAIC fined 13 operating companies and the Building Materials Industry Association of Liaoning Province, around RMB 15 million (approx. US$ 2.4 million). SAIC concluded that the association had facilitated ACER Quarterly January 2014 – May 2014 5 the reaching of monopoly agreements among its members. In 2013, SAIC concluded an investigation into the tourism industry in Yunnan. The investigation involved the bundling of services by hotels, tourist attraction sites, coach companies and travel agencies, and SAIC imposed fines on the Yunnan Tourism Association and the Yunnan Travel Agency Association. Also in 2013, SAIC was reported to have launched an investigation into Tetra Pak. It is reported that more than 20 officials are involved in the investigation of the company’s alleged abuse of its dominant position by tying the sale of its packaging machines to packaging materials. Also among SAIC’s significant anti-monopoly initiatives are proposed guidelines on the enforcement of competition law in relation to intellectual property rights in China. SAIC is currently reviewing a draft of the guidelines in connection with which it had previously consulted with antitrust authorities, including the US and EU authorities, and domestic and international corporations. SAIC is also focusing on capacity building, training of staff, and building a database to improve information sharing and help standardize its enforcement efforts around the country. Deputy Director General Li Qing and Deputy Director Zhao Yiqin both explained how NDRC and SAIC coordinate their investigations at national and local levels, transferring a matter if necessary between the two authorities, without conflict or dispute between the two authorities over which authority investigates which matter. Common Market for Eastern and Southern Africa (COMESA) COMESA is a regional organization with the mission of promoting economic integration through trade and investment in Eastern and Southern Africa (the Common Market). Currently, COMESA has 19 member states – Burundi, Comoros, the Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, and Zimbabwe. According to figures presented by COMESA Director and Chief Executive Officer George Lipimile at the ABA Spring Meeting, the COMESA region represents about US$152 billion of imports and about US$157 billion of exports (based on 2008 data). The COMESA Competition Commission (CCC) has powers to investigate mergers and anti-competitive business practices within the COMESA nations, and is based in Lilongwe, Malawi. The CCC was established in 2008 and became fully operational in 2013. To date, about 30 merger filings have been made to the CCC. As well as reviewing mergers, the CCC is empowered to prohibit anti-competitive agreements that prevent, restrict or distort competition within the Common Market, practices between firms engaged in rival or potentially rival activities in the Common Market, and conduct that constitutes an abuse of dominance in the Common Market or a substantial part of the Common Market. The regulations empower the CCC to impose fines on firms that have infringed these regulations. The CCC also has powers to authorize agreements or arrangements if it determines that there are, broadly, efficiencies or public interest benefits (as recognized by the regulations) that outweigh the anti-competitive effects. There are similar, but it seems not identical, powers in relation to mergers. Director and CEO George Lipimile reported that the CCC has issued several advisory opinions and reprimands of restrictive business behavior since the CCC started work last year. Conceived as a supranational authority, the CCC faces a number of challenges, including the scope of its jurisdiction over mergers, the size of filing fees for mergers, the relationship between the laws and regulations of the COMESA regime and those of its member states, as well as its overall resourcing levels. The CCC is taking proactive steps to address these concerns. At the ABA Spring Meeting, Director and CEO George Lipimile explained that the CCC is working on setting out a framework for analysing mergers, including criteria for evaluating potential unilateral and coordinated anticompetitive effects, guidelines for the treatment of efficiencies, and criteria for remedies or conditions to address the anti-competitive effects of a merger, as well as on the jurisdictional issues that the merger regulations have given rise to. In April 2013, the CCC published initial draft merger assessment guidelines and, in collaboration with the International Finance Corporation of the World Bank, has since engaged a consultant to 6 ACER Quarterly January 2014 – May 2014 advise on the review of the current merger regulations. In addition, the CCC has been seeking feedback from corporations and advisers that have experience with the COMESA regime. For example, a workshop was held in April 2014 to discuss suggested amendments to the draft guidelines, and a second workshop is expected to be held over the summer. It has been reported that the CCC intends to finalize the draft merger assessment guidelines after the second workshop. The CCC has also taken informal steps to adjust its enforcement regime. For example, the absence of turnover thresholds has been widely criticized as it could lead to an interpretation that all mergers in which either or both of the parties generate turnover in two or more COMESA member states would require a complete notification filing and payment of a substantial filing fee. The CCC has elected to interpret the relevant regulations for parties who pro-actively approach the CCC so as to resolve issues for transactions that lack a sufficient nexus with COMESA and do not restrict competition in COMESA. There are reports that the CCC has issued five “comfort letters” that, in effect, exempt such transactions from the need for a complete filing and payment of the high filing fees. The increasing importance of antitrust enforcement in emerging regimes As the senior enforcement officials at the ABA Spring Meeting each made clear, antitrust enforcement in emerging jurisdictions is having an increasing effect on corporations that do business around the world. The number of filings needed to be made in any global merger and the number of cartel or conduct investigations to which global companies are subject around the world seems to be set only to increase, with emerging jurisdictions playing an increasingly significant role in this enlarged enforcement activity. In response, global corporations increasingly need to engage in global strategies and coordinated multi-jurisdictional assessments of their antitrust issues to minimize the risks of unexpected or inconsistent outcomes around the world – all the more so as procedural and substantive differences continue to exist among different antitrust jurisdictions, including not least emerging jurisdictions. Interestingly, the four authorities represented at the ABA Spring Meeting talked about the role of economic analysis in their investigations. CADE President Vinicius Marques de Carvalho explained that two of the seven CADE Commissioners are economists, and since 2012, CADE has had a specific unit dedicated to helping the Commissioners and Superintendent with the economic issues arising in complex mergers and conduct cases. NDRC Deputy Director Li Qing referred to enforcement generally as a collaboration of law and economics, and explained that, in NDRC’s anti-monopoly division, half of the staff members are lawyers, and the other half are economists. She also said that NDRC regularly consults with professional institutions, academic institutions, scholars, and expert committees under the State Council, and frequently involves economic analysis in the penalty phase of an investigation. SAIC Deputy Director Zhao Yiqin explained that SAIC follows similar methods as NDRC with respect to economists in its case investigations. As well as using in-house economists, SAIC also works with external economists, such as professors and economic consulting groups, both domestic and international. Director and CEO George Lipimile explained that the CCC has two economists on staff and has the authority to seek outside academic or consulting advice for complex matters. Also significantly, the officials talked about international assistance and cooperation among antitrust authorities around the world. Director and CEO George Lipimile, representing the newest authority, spoke of the assistance the CCC has received from various organizations and institutions, including the ABA, major law firms, and the U.S. Federal Trade Commission. NDRC Deputy Director Li Qing explained that NDRC communicates with other antitrust jurisdictions and seeks international collaboration. She referred to the memoranda of understanding for cooperation that the Chinese anti-monopoly authorities have signed with the EU, Korean, UK, and U.S. authorities, and said that anti-monopoly rules are a world language. In addition, she said that every jurisdiction has its own characteristics and features according to its own political and economic systems and its developmental stages. ACER Quarterly January 2014 – May 2014 She also said that NDRC is continuing to strengthen its international collaboration and is also willing to collaborate with other antitrust authorities on specific cases. CADE President Vinicius Marques de Carvalho stressed the increasing role of multi-jurisdictional antitrust enforcement, the need for international cooperation especially in combating global cartels, and the importance of convergence in international enforcement practices. n Rachel Brandenburger* Senior Advisor, New York T +1 212 918 3777 rachel.brandenburger@hoganlovells.com Daniel E. Shulak Associate, New York T +1 212 918 3308 daniel.shulak@hoganlovells.com * Foreign legal consultant admitted in England and Wales.8 ACER Quarterly January 2014 – May 2014 The situation to date Until now, the UK water sector has been subject to a strict merger control regime, under which all transactions involving mergers between UK water companies (other than those involving a minority stake which was not sufficient to give any control for these purposes) were subject to an automatic in-depth phase II review by the UK competition authorities lasting several months. The only exception was where the turnover of either the target water business, or the acquirer’s water business, did not exceed £10 million – a small mergers threshold which is now too low to be relevant for most water company transactions. This contrasts with the position under the general merger control rules whereby only a minority of transactions – those potentially giving rise to a substantial loss of competition – are referred for a full phase II investigation. It has arguably reduced M&A activity in the sector and acted as an obstacle to industry consolidation. Furthermore, initiation of the phase II reference to the Competition Commission (replaced as of this April by the Competition and Markets Authority (“CMA”)) rested on something of a hair trigger in that it had to be made where “it is or may be the case that … arrangements are in progress which, if carried into effect, will result in a [water] merger”, and so parties ran the risk of being tipped into a phase II investigation even at an early stage of deal planning. Once referred, water mergers are assessed by reference to a test aimed at preserving so-called comparative competition, whereby the water regulator OFWAT’s ability to regulate is protected through the maintenance of a sufficient number of independent water companies from which it can derive information in order to make robust performance comparisons and thereby set stringent price caps, efficiency targets and service standards. The questions asked under this test are whether the merger would prejudice the ability of OFWAT to make comparisons between UK water companies -- and also whether the merger would give rise to (offsetting) relevant customer benefits in the form of lower prices or better service. The reasons for this special regime go back to the historic position of UK water companies as a series of regional monopolies not subject to market competition and so in need of strong regulation in order to deliver the best service to customers. Reflecting these constraints, there have been only two water mergers reviewed under the current version of the legal regime that has been in force for the last decade. In South East Water / Mid Kent Water (2006) there was an adverse finding because of the loss of comparator (a neighbouring company) and the parties were required to give significant price cuts to customers to remedy this. More recently, in South Staffordshire / Cambridge Water (2012), the merger was allowed, although the authorities stated that the decision was finely balanced. However, in recent years, as perhaps acknowledged in the slightly more permissive approach in South Staffordshire / Cambridge Water, there has been increasing pressure for legislative reform to relax the special regime for water mergers. More sophisticated regulation and the gradual introduction of market competition in various areas of the water supply chain have strengthened the case for giving less weight to the maintenance of the current number of independent water companies (several of which are relatively small) for comparator purposes. The new rules Under the new Water Act 2014, further exceptions to the requirement for a phase II review of water mergers have been introduced in order to allow a lighter-touch approach. The CMA has the discretion not to initiate a phase II reference where: ● In the case of prospective mergers, the arrangements are not sufficiently advanced or not sufficiently likely to proceed (this addresses the hair trigger problem of a phase II reference being triggered prematurely at the deal planning stage); or ● The merger is unlikely to prejudice OFWAT’s ability to make comparisons between water companies in order to regulate; or ● Although the merger is likely to prejudice OFWAT’s ability to make comparisons between water companies, that prejudice is outweighed by relevant customer benefits. UK water mergers made easier ACER Quarterly January 2014 – May 2014 9 For the latter two situations, the CMA must obtain an opinion from OFWAT on those questions and consider it before coming to a decision, and OFWAT is obliged to make its assessment using the approach set out in a published statement of methods, which must indicate the criteria and their relevant weighting which it will apply. This should improve predictability for potential acquirers and investors about the likelihood of transaction being subject to a phase II review. Further flexibility in dealing with water mergers is introduced by giving the CMA the ability to accept undertakings as an alternative to a phase II reference (eg a price cut for customers). In addition, the CMA is required to review and advise the Government from time to time on whether the £10 million turnover threshold should be changed. The Government has considered but decided against increasing it to £70 million in introducing the new Act, but this provides the possibility for the issue to be revisited in due course in order to make the small mergers exception applicable to a broader group of water companies. Promoting the introduction of more market competition, the new Water Act also introduces new types of licences for market entrants to wholesale and retail water and sewerage services using incumbent water companies’ networks. Implications These reforms, while not a radical change to the special regime for UK water mergers, nevertheless potentially open the way to more M&A activity in the sector by reducing the deterrent of a lengthy and burdensome phase II merger control investigation being triggered in almost all cases. The changes could increase industry buyer activity, alongside financial investor interest, in water company targets. Although essentially procedural, they are also indicative of a trend, taking account of other developments in the industry, which places less weight in preserving the current number of independent comparator companies. While the assessment of any particular water merger will turn on the identity of the companies involved and the details of the proposal, at a more general level all of this suggests that there will be greater scope to obtain merger control approval of water mergers, particularly those involving the smaller water-only companies where there may be efficiencies giving rise to relevant customer benefits. With greater separation of activities and competition in a number of areas, there is also the possibility of cross-company restructuring and consolidation at particular levels of the supply chain as an alternative to the acquisition of entire water companies in their current vertically integrated form. Reflecting the current climate, it is interesting to note the recent comments of OFWAT’s Chief Executive, Cathryn Ross, at the regulator’s annual City briefing last month, which touch on these issues: “We also recognise that changes to industry structure may be appropriate. I don’t have an industry blueprint that I’m working to, but I would be surprised if 18 vertically integrated water companies were the most appropriate structure. And I want to say clearly that we are open to conversations about changes to that structure.” n Mark Jones Partner, London T +44 20 7296 2428 mark.jones@hoganlovells.com10 ACER Quarterly January 2014 – May 2014 On 17 April 2014, the European Parliament adopted a directive which governs damages actions for infringements of competition law. This directive has been long – awaited and turns an important new page for the EU competition law enforcement landscape. Why the directive? Historically, damages actions arising out of infringements of competition law have been more commonly seen in the United States, where the incentive of triple damages and the availability of class actions and contingency fees have encouraged private enforcement. Conversely, in the EU greater emphasis has been placed on the public enforcement regime, looking to investigations and fines by competition authorities to deter infringement. Effective private enforcement in the EU has largely been limited to a few jurisdictions, such as the UK, Germany, and the Netherlands. This is now changing. This directive seeks to harmonise certain divergences between Member States’ systems with a view to establishing a minimum standard which facilitates competition damages actions throughout the EU. It also seeks to fine-tune the interaction between private and public enforcement by, for example, clarifying the extent to which leniency applications can be ordered for disclosure in private litigation. Key elements The key elements of the directive are as follows. 1. Full compensation Member States must ensure that victims of competition law infringements are able to obtain “full compensation”. This should cover the “right to compensation for actual loss and for loss of profit, plus payment of interest”. However, it is expressly provided that “full compensation” should not lead to “overcompensation, whether by means of punitive, multiple or other types of damages”. 2. Disclosure of documents The Directive provides that national courts should have extensive rights to order the disclosure of evidence from a defendant or third party. However, these rights should be proportionate. The Directive seeks to avoid “fishing expeditions”, by stating that national courts should “prevent non-specific search of information which is unlikely to be of relevance for the parties in the procedure”. Furthermore, Member States shall ensure that national courts give full effect to applicable legal professional privilege under EU or national law, and that they have at their disposal effective measures to protect confidential information. Disclosure of evidence should be ordered from a competition authority only when it cannot be reasonably obtained from another party or a third party. Whilst the new rules add little to existing English disclosure rules, they represent a radical change for certain Member States which do not currently require disclosure of documents. 3. Evidence on the file of a competition authority – Protected documents With respect to documents that form part of the relevant competition authority’s file, the Directive establishes a black, grey and white list. The lists open up a wide variety of evidence on the competition authority’s file to disclosure, but also seek to protect the attractiveness of leniency programmes by limiting the risk that certain documents provided to a competition authority in the context of a leniency application might later become available for use against leniency applicants in damages actions. Black list National courts cannot at any time order the disclosure of leniency corporate statements and settlement submissions. This prohibition on disclosure extends to extracts from such documents which appear in otherwise grey or white lists. The European Commission has been keen to exempt leniency statements from disclosure requirements in order to ensure that companies are not deterred from cooperating with it under its leniency programme. By imposing an absolute prohibition on the disclosure of leniency statements with this black list, the European Commission has attempted to resolve the uncertainty created by the Court of Justice of the European Union in Pfleiderer (Case C-360/09), which held that, in the absence of EU rules, it is for the national courts to determine, on a case-by-case basis, whether to allow claimants access to leniency documents submitted to a competition authority by a defendant. EU antitrust damages directive adopted – path now cleared for an increase in damages actionsACER Quarterly January 2014 – May 2014 11 Grey list After a competition authority has closed its proceedings by adopting a decision or otherwise, national courts may order the disclosure of documents such as requests for information and the statement of objections, replies of parties to requests for information and settlement submissions that have been withdrawn. White list National courts can order the disclosure of documents that do not fall into any of the categories listed in the grey and black lists. 4. Limitation periods Member States shall ensure that the limitation period for bringing damages actions is at least 5 years. This period runs from the time when the claimant knows, or can reasonably be expected to know, that the particular defendant infringed competition law and caused the claimant harm. The limitation period is suspended or interrupted during a competition authority’s investigation and until at least one year after an infringement decision has become final or proceedings are otherwise terminated. This rule has the potential to give rise to very long periods of exposure to claims. 5. Joint and several liability Member States shall ensure that undertakings which infringed competition law are jointly and severally liable. This is subject to two exceptions. ● An immunity recipient is liable only to its own direct and indirect purchasers, unless the claimant can prove that it cannot obtain full compensation from the other undertakings that were involved in the same infringement of competition law ● Small or medium-sized enterprises that did not lead or coerce others into the infringement and have not committed a competition law infringement before shall be liable only to their own direct or indirect purchasers if (i) their market share was below 5% during the infringement and (ii) application of the normal rules would “irretrievably jeopardise its economic viability and cause its assets to lose all their value”. Infringing companies may recover a contribution from any other infringing undertaking, the amount of which will be determined in the light of their relative responsibility for the harm caused by the infringement. An immunity recipient will be liable in a contribution claim only for the loss that it has caused to its own direct or indirect purchasers. Protection from contribution claims is also provided for infringers who reach consensual settlements with claimants. 6. Passing-on defence The Directive requires all Members States to allow the passing-on defence, and thereby to exclude compensation being paid to claimants that have passed on their loss to others, such as their own customers. The defendant bears the onus of proving that the overcharge was passed on. For this purpose, defendants may reasonably require disclosure from the claimant and from third parties. 7. National decisions Member States shall ensure that a final decision of a national competition authority or a review court be presented before their national courts “as at least prima facie evidence that an infringement of competition law has occurred.” The Directive no longer prescribes (as it did in its earlier draft) that decisions of national competition authorities or courts of one Member State be binding before a court of another Member State. 8. Presumption and quantification of harm It shall be presumed that cartel infringements cause harm. The infringer shall have the right to rebut this presumption. Member States must allow national courts to estimate the amount of harm “if it is established that a claimant suffered harm but it is practically impossible or excessively difficult to precisely quantify the harm suffered on the basis of the available evidence.” 9. Collective actions The directive does not provide for collective actions. However, in June 2013, the European Commission published a Recommendation on collective redress. Whilst this document is non-binding, it encourages Member States to introduce opt-in collective redress claims for breaches of EU law. A number of Member States have already introduced collective claims. France, for example, introduced collective claims based on breaches of competition law in March this year.ACER Quarterly January 2014 – May 2014 What next? Member States have two years and 20 days to implement the Directive within their own national legislation following the directive’s formal publication (expected September/October 2014). However, national judges may well, even before then, begin to take the Directive into account in pending civil damages proceedings to the extent that they are able to do so within their current national rules and procedures. Impact Companies now need to brace themselves for a hardened enforcement landscape in the EU. Whilst the impact will be felt more in some Member States than others, the Directive contains significant changes for every jurisdiction. On the one hand, claimants are bolstered by the long limitation period provided for in the Directive, the presumption of harm, and the disclosure rules which will have a large impact on the legal regimes of some Member States. On the other, defendants will benefit from the greater clarity and uniformity in relation to disclosure of leniency material, the rules on the passing-on defence and the entitlement to bring contribution claims. The Directive applies to any infringement of European competition law and competition law of the Member States. This could include abuse of dominance, and even non-hardcore infringements of competition law within vertical arrangements. This hardening of the competition enforcement regime in the EU therefore impacts not just those companies involved in a cartel. This adds further incentives for companies to ensure that the entirety of their competition law compliance programme is as effective as possible. n Ivan Shiu Partner, London T +44 20 7296 2834 ivan.shiu@hoganlovells.com Peter Citron Of Counsel, Brussels T +32 2 505 0905 peter.citron@hoganlovells.comACER Quarterly January 2014 – May 2014 13 On 10 April 2014, the Department of Justice (DOJ) and Federal Trade Commission (FTC) issued a joint policy statement on the antitrust implications of sharing cybersecurity information to help facilitate the flow of cyberintelligence throughout the private sector. The statement addresses the long-standing concern that sharing cyberintelligence may violate antitrust law under certain circumstances and explains the analytical framework for such arrangements to make it clear that legitimate cyberintelligence exchanges will not raise antitrust issues. Intelligence sharing is considered a productive, if not critical, step towards protecting against and responding to cyberattacks. Businesses are increasingly sharing information with each other to help guard against future cyberattacks or even discover existing undetected attacks on their information systems. In today’s increasingly complex threat environment, organizations commonly have similar vulnerabilities in their information systems and often face similar threats due in large part to malware becoming increasingly commodified on black markets. Thanks to a thriving market for hacker toolkits, advanced malicious software is now available to less technically sophisticated criminals, who can easily configure the same malware to attack across different organizations. As a result of the heightened threat of cyberattacks, the U.S. government has sought to promote cyberintelligence sharing between the private and public sector through both executive action and legislation. For example, several bills (including this one) have been introduced in the House and Senate to help encourage information sharing by, amongst other things, establishing a clearing house for threat information, incidents, and recovery actions. Moreover, President Obama signed the Executive Order on Improving Critical Infrastructure Cybersecurity in February 2013, which called for the U.S. government to increase the volume, timeliness, and quality of cyber threat information shared with U.S. private sector entities. Additionally, information sharing activities have been incorporated into various information security standards and frameworks. For example, the National Institute of Standards and Technology (NIST) “Framework for Improving Critical Infrastructure Cybersecurity,” released in February 2014, indicates that entities should have a process in place for receiving information on threats and vulnerabilities from information sharing forums and sources. However, information sharing remains a voluntary best practice amongst security professionals, as no law or regulatory standard has gone so far as to mandate the sharing of threat information with unaffiliated third parties. And although organizations in certain sectors, including financial services, are known to actively share cyberintelligence with each other through Information Sharing and Analysis Centers (ISACs) and other fora, obstacles still exist to the widespread sharing of threat information across the United States. There are, for example, concerns over the currency and practical utility of some of the threat information being shared. Moreover, for many years concerns have been voiced over the risk that sharing threat information with other businesses might be viewed as an unlawful anticompetitive practice in violation of antitrust laws. In response to this particular concern over antitrust risks, the DOJ’s Antitrust Division and the FTC (collectively, the Agencies) recently released a joint “Antitrust Policy Statement on Sharing of Cybersecurity Information” to reduce uncertainty for those who want to share information on cyberattacks. By explaining how their analytical framework applies to information sharing, the Agencies sought to “make it clear that they do not believe that antitrust is – or should be – a roadblock to legitimate cybersecurity information sharing.” In examining information exchanges, the Agencies review the nature, business purpose, and likely competitive effect of an agreement. The Agencies’ primary concern is with the sharing of any competitively sensitive information – such as price, cost, or output information – that may facilitate price or output coordination and undermine competition among competitors. Although some agreements – such as those fixing prices or outputs, rigging bids, or dividing markets among competitors – will almost always be illegal, the central question for most information sharing agreements is “whether the relevant agreement likely harms competition by increasing the ability or incentive profitably to raise prices above or reduce output, quality, service, or innovation below what likely would prevail in the absence of the relevant agreement.” DOJ and FTC clarify antitrust implications of cybersecurity information sharing14 ACER Quarterly January 2014 – May 2014 The Agencies’ recent joint statement applies this framework to cybersecurity threat information exchanges to establish that “properly designed sharing of cyber threat information should not raise antitrust concerns.” When evaluating the antitrust risks of sharing cyberintelligence, businesses should take into account the three main factors that the Agencies relied upon in coming to their conclusion: ● Cyber threat information sharing can improve efficiency and help secure our nation’s networks of information and resources. Because companies are almost always likely to share information “in an effort to protect networks... and to deter cyberattacks” rather than conspire or harm competition, the Agencies will “consider the valuable purpose behind the exchange of information.” ● Cyber threat information typically is very technical in nature. The Agencies note that the “nature of the information being shared is very important to the analysis.” Because cybersecurity information such as threat signatures, indicators, and IP addresses is highly technical, “sharing of this type of information is very different from the sharing of competitively sensitive information such as current or future prices and output or business plans.” ● Cyber threat information exchanges are unlikely to harm competition. As noted above, “cyber threat information covers a limited category of information.” Because of this, disseminating cyber threat information is “unlikely in the abstract to increase the ability or incentive of participants to raise price or reduce output, quality, service, or innovation.” This analysis mirrors the guidance provided by the DOJ in a business review letter to the Electric Power Research Institute (EPRI) in October 2000. The EPRI had developed an Enterprise Infrastructure Security (EIS) program to help exchange industry best practices for cybersecurity programs as well as information related to specific cybersecurity vulnerabilities. The EPRI also adopted a number of measures to prevent any anticompetitive effects, including 1) ensuring all information exchanged related directly to physical and cybersecurity; 2) prohibiting the discussion of specific prices for cybersecurity equipment and systems; 3) prohibiting the exchange of company-specific competitively sensitive information; 4) prohibiting the use of the program as a conduit for discussions by vendors, manufacturers, and security providers with respect to any exchange participants; and 5) ensuring neither the EPRI nor any participant recommended the products or systems of any particular manufacturer or vendor. As in the Agencies’ recent joint statement, the DOJ in 2000 noted that the information exchange did not appear to pose any threats to competition and, indeed, could “result in more efficient means of reducing cyber–security costs” and lead to savings for consumers, which “could be procompetitive in effect.” Thus, companies that share technical cybersecurity information such as indicators, threat signatures, and security practices, and avoid sharing competitively sensitive information such as business plans, prices, or output, have ample assurance from the relevant agencies in the United States that they should not run afoul of the antitrust laws. Nevertheless, businesses should still conduct a fact-driven analysis of their information sharing policies and procedures based on the Agencies’ 2014 guidance in order to ensure that they are sharing cyberthreat information in accordance with antitrust law. n Janet McDavid Partner, Washington T +1 202 637 8780 janet.mcdavid@hoganlovells.com Joseph Krauss Partner, Washington T +1 202 637 5832 joseph.krauss@hoganlovells.com Mike Parsons Associate, Washington T +1 202 637 6152 michael.parsons@hoganlovells.comACER Quarterly January 2014 – May 2014 1516 ACER Quarterly January 2014 – May 2014 On 1 April 2014, widespread reforms to the UK’s competition law regime entered into force. The Office of Fair Trading (OFT) and Competition Commission (CC) have ceased to exist and been replaced by the Competition and Markets Authority (CMA). As part of the reforms, the merger control regime has been toughened up. This briefing sets out some of the key changes for deal-makers. What hasn’t changed? Much stays the same: ● The jurisdictional tests remain the same. Mergers are still subject to the UK regime if the target company’s UK turnover is over £70 million, or if the deal creates or enhances a UK share of supply of 25% or more for goods or services of a particular description. ● Deals are still subject to the UK regime in cases where one business acquires ‘material influence’ over another business, even if it falls short of a controlling stake. ● The substantive analysis of whether a deal is anticompetitive has not changed, and the CMA has the ability to block deals, or require far-reaching remedies such as divestments or behavioural undertakings. ● The Phase 1/Phase 2 investigation structure remains. The vast majority of deals will still be cleared after the initial Phase 1 review process; potentially problematic deals will still be subject to the in-depth 24-week Phase 2 process. ● The merger control notification regime is still voluntary, although it is now slightly more risky not to notify for pre-clearance as a result of the strengthened hold-separate measures discussed below. ● The filing fees of between £40,000 and £160,000 remain the same (they were only fairly recently increased to current levels). What has changed? Revised process Both the CMA’s processes and the documentation required have been revised. A more prescribed form of notification has been introduced. This requires extensive data gathering and drafting. Deal parties will also need to provide a potentially large volume of internal documents to the CMA. It remains to be seen to what extent CMA case teams will be willing to grant derogations from the full requirements. So parties will need to prepare the materials for submission to the CMA earlier in order to avoid delay. The CMA now has formal information-gathering powers applying to all stages of the merger assessment process and to both the deal parties and third parties, with the ability to impose financial penalties for failure to comply with a compulsory request. Under the previous regime, the OFT did not have the power to force parties to provide information or documents, and deadlines were less strict. So the process will be more demanding in this respect as well. Hold separate measures The CMA has enhanced powers to impose so-called interim measures to prevent or unwind pre-emptive transaction implementation which might prejudice their subsequent ability to unwind the deal if they conclude it is anti-competitive. This now applies at both the Phase 1 and Phase 2 stages of the review – and to both mergers that have completed and those that have not yet done so. The powers apply even where the CMA is not yet clear whether it has jurisdiction over the deal. The measures can apply with immediate effect once issued; the CMA will now issue orders rather than take time to negotiate measures by way of undertakings agreed with the parties. The CMA can impose large financial penalties (up to 5% of worldwide group turnover) where interim measures are breached. These enhanced powers also now allow the CMA to order merging parties to reverse any integration that has already happened (at the parties’ own cost) and not to integrate further. The onus will be on the parties to plead for derogations where these are needed – for example in an asset acquisition where the target cannot stand on its own and needs support services from the new owner. This is a significant change and the CMA has said that it will look to impose these measures to a much greater extent than it did under the previous regime. At the very least, parties should expect the CMA to impose them in nearly all mergers that have completed prior to the start of the CMA’s investigation. New UK merger control regimeACER Quarterly January 2014 – May 2014 17 Single authority review The transition from Phase 1 to Phase 2 ought to be smoother now that cases stay within the same organisation throughout the process. For example, some members of the Phase 1 case team will continue to work on the case in Phase 2 and there should be less repetition of information requests at Phase 2. Weighed against these efficiencies is the increased risk of ‘confirmation bias’ affecting Phase 2. To address this, new CMA members will join the case team in order to preserve the ‘fresh pair of eyes’ that the CC used to provide, which was a feature generally valued by merging parties. Timing Statutory time limits have been introduced for all stages of the merger assessment process, including the following: ● There is a strict 40 working day time limit for Phase 1 investigations – although the clock only starts when the CMA says it starts, and the CMA can stop the clock fairly easily (for example, by sending an information request with a short deadline and then stopping the clock when the parties fail to comply in time). The new statutory deadline is also likely to make pre-notification discussions longer in practice because before the clock starts both the CMA case team and the parties will want to ensure that the CMA will have all the information it needs. ● There is a time-limited procedure for offering undertakings to remedy competition concerns so as to avoid a Phase 2 inquiry and for the CMA to decide whether to accept them. This is an improvement over the previous process, which essentially required parties to offer the undertakings (if they wished to) before they knew for sure what the problems actually were. ● The CMA can also now suspend the start of its Phase 2 investigation for up to 3 weeks, upon request by the parties where they are likely to abandon a merger that has not yet been completed. ● Following a Phase 2 inquiry, there is a shorter period of 12 weeks (extendable by a further 6 weeks) for the CMA to make an order or accept undertakings implementing final remedies. Conclusion Some aspects of the UK merger regime have been toughened up, such as the documentation requirements, the information-gathering powers, and the ability to unwind integration that has already occurred. While these changes are not fundamental, the regime is likely to feel more severe than it used to and more similar to regimes with mandatory notification processes such as under the EU Merger Regulation. n Mark Jones Partner, London T +44 20 7296 2428 mark.jones@hoganlovells.com18 ACER Quarterly January 2014 – May 2014 On 21 March 2014, the European Commission adopted new rules for the assessment of technology transfer agreements under EU competition law. The package will apply from 1 May 2014. The package involves changes to two instruments: ● the Technology Transfer Block Exemption (“TTBER”), which provides a safe harbour until April 2026 for certain agreements that license patents or other technology rights for production, provided that they do not contain certain blacklisted or excluded provisions and are entered into between companies with limited market power (as defined by reference to market shares); and ● the Technology Transfer Guidelines, which provide guidance on the application of the TTBER and on the application of EU competition law to technology transfer agreements that fall outside the safe harbour of the TTBER. Whilst the package does not involve radical change for the EU regime, it does impose a stricter regime for certain contractual provisions such as exclusive grant–backs, termination for challenge clauses, and passive sales restrictions. These provisions will now not benefit from an automatic safe harbour, and will require assessment on a case-by-case basis. The package also provides more detailed and clearer guidance in certain areas, most notably with respect to settlement agreements and technology pools. Main changes to the TTBER The main changes to the TTBER include the following. ● Exclusive grant-backs. An exclusive grant-back provides the licensor with the exclusive right to exploit any improvements made by the licensee to the licensed technology. Under the new TTBER, all exclusive grant-backs (irrespective of whether they refer to severable or non–severable improvements) will now fall outside the safe harbour of the block exemption and require individual assessment. This contrasts with the position under the old TTBER where only exclusive grant-backs of severable improvements were excluded. However, in our view the Commission’s “more prudent approach” is designed to enable a specific consideration of the impact of the precise clause concerned on competition and does not indicate a general presumption against such clauses. ● Termination for challenge clauses. Termination for challenge clauses provide the licensor with the possibility to terminate the agreement if the licensee challenges the validity of the licensed intellectual property. The new TTBER excludes these clauses in non–exclusive licensing agreements from its safe harbour, requiring them to be assessed on a case– by–case basis. Termination for challenge clauses in exclusive licences continue to be included within the safe harbour (provided that the market share limits are not exceeded). The draft of the new TTBER, which was issued for consultation in February 2013, proposed to exclude all termination for challenge clauses from its safe harbour. This proposal was heavily criticised during the consultation on the basis that it could serve as a disincentive for licensors to grant a licence. Indeed, termination for challenge has long been an accepted compromise between the licensor’s desire actually to prohibit challenges and the licensee’s desire not to pay royalties for invalid intellectual property rights. The controversy has led to the European Commission in its final text to distinguish between exclusive and non–exclusive licences. In its press release accompanying the final package, the European Commission notes that this distinction “will in particular support SME innovators to license out their technology on an exclusive basis, without creating a situation of dependence towards their exclusive licensees.” It might also be noted that the Commission’s distinction is consistent with its insistence in the Samsung case that a willing licensee on FRAND terms for standard essential patents should always be free to challenge the validity of the patents concerned. ● Purchase of raw material or equipment. The new TTBER introduces a revised test for determining whether provisions in a technology transfer agreement that relate to the sale and purchase of raw material or equipment are also covered by the TTBER. The test under the old TTBER was whether such provisions were “less important” than the New EU antitrust rules for technology transfer agreementsACER Quarterly January 2014 – May 2014 19 actual licensing of technology, which was difficult to apply. The test is now whether the provisions are “directly related” to the production or sale of the contract products which are produced with the licensed technology. This means that even if the input bought from the licensor (and to be used with the licensed technology) is more expensive than the royalties to be paid for the licensed technology, the provisions relating to the purchase are still covered by the TTBER. This change will potentially be very reassuring to licensors. ● Passive sales restrictions. Under the old TTBER, a licensor could restrict not only active sales but also passive sales (responding to unsolicited orders) to a territory or customer group reserved exclusively to a single licensee for an initial two year period after the protected licensee began sales. The European Commission, with the aim of aligning the TTBER with the block exemption regulation on vertical restraints, has now removed passive sales restrictions from the automatic exemption of the TTBER. This type of restriction now needs to be assessed on a case-by-case basis. The Guidelines, however, state that this type of passive sale restrictions can still be allowed if the restraints are objectively necessary for the licensee to penetrate a new market. They also state that “in an individual case a longer period of protection for the licensee might be necessary in order for the licensee to recoup the costs incurred.” Realistically, this change is not expected to have much impact. The old possibility for a block-exempted two year passive sales restriction was of little commercial usefulness, because of the short time period involved and the difficulty of administering a system where the restriction did not depend on a single date known to the restricted licensee (such as when it obtained its license or when it began sales) but rather on the multitude of possibly uncertain dates on which other licensees began sales in their respective territories across Europe. ● No new treatment of in-house production. The draft new TTBER, which was circulated for consultation in February 2013, included a new market share threshold of 20% for agreements between non-competing undertakings when the licensee owns a technology for in-house production similar to that of the licensor. The reason for the change was allegedly to avoid a situation in which the licensee could foreclose entrants to the downstream market by entering into an exclusive license with the only company licensing out a competing technology whilst benefiting from the higher market share threshold for non-competitors (30%). The European Commission has abandoned this additional threshold in the new TTBER. In its press release, the European Commission states that “this was seen by stakeholders as adding too much complexity to deal with a scenario which is rare.” Guidelines for technology transfer agreements The main changes to the guidelines include the following. ● Settlement agreements. A settlement agreement is a contractual resolution between the parties to end disputes regarding the infringement or validity of IPR. The new guidelines clarify that settlement agreements which lead to a delayed or otherwise limited ability for the licensee to launch the product on any of the markets concerned may be prohibited by Article 101(1) TFEU. The guidelines note that “pay-for-restriction” or “pay-for-delay” type settlement agreements often do not involve the transfer of technology rights, but are based on a value transfer from one party in return for a limitation on the entry and/or expansion on the market of the other party and may be caught by Article 101(1). The European Commission notes that it will be “particularly attentive to the risk of market allocation/ market sharing.” The clarification reflects the position that the European Commission has taken with respect to patent dispute settlements in the pharmaceutical sector. The guidelines state that non-challenge clauses in settlement agreements are generally considered to fall outside Article 101(1) TFEU. However, a non-challenge clause in a settlement agreement may infringe Article 101 (1) “where an intellectual property right was granted following the provision of incorrect or misleading information.” Scrutiny of such clauses may also be necessary “if the licensor, besides licensing the technology rights, induces, financially or otherwise, the licensee to agree not to challenge the validity of the technology rights”.20 ACER Quarterly January 2014 – May 2014 ● Technology pools. Following the European Commission’s most recent experience in the field of standards, the European Commission clarifies that its guidance on pools of essential patents includes both pools relating to patents needed to produce a particular product but also pools of patents needed to comply with a particular standard. The European Commission proposes a comprehensive safe harbour expected to provide further incentives to the creation of pro-competitive pools. Furthermore, the European Commission clarifies that licensing agreements between the pool and third parties continue to fall outside the scope of the TTBER. Impact The new regime comes into force at a time when competition authorities globally are increasing antitrust enforcement at the interface between IP and competition law. The European Commission has taken recent enforcement action in the fields of pharmaceuticals and mobile communications devices. The US competition authorities are similarly focused on these industries, particularly following the recent Supreme Court decision in US v. Actavis that “pay for delay” settlements have “the potential for genuine adverse effects on competition” and are subject to scrutiny under the rule of reason.” In China, antitrust issues have arisen in relation to standard essential patents, both in the merger and conduct contexts, for example in the Huawei v. InterDigital litigation. One of China’s competition authorities – the State Administration for Industry and Commerce – is currently drafting a regulation on the application of antitrust rules to IPRs, and the regulation’s scope is expected to be similar, though by no means identical, in content as the TTBER regime. Against this global trend of increasing scrutiny, business should take careful note of the new regime, and ensure that their licensing practices reflect the new rules. n Christopher Thomas Partner, Brussels T +32 2 505 0929 christopher.thomas@hoganlovells.comACER Quarterly January 2014 – May 201422 ACER Quarterly January 2014 – May 2014 The Common Market of Eastern and Southern Africa (“COMESA”) is a supranational organisation with 19 Member States: Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe. The COMESA Competition Commission (“CCC”) commenced operations on 14 January 2013 and implements a supra-national merger control regime (as well as other competition provisions) under: ● the COMESA Competition Rules; and ● the COMESA Competition Regulations 2004 (the “Regulations”). In a nutshell, the COMESA merger control regime is based on the following rules: ● zero turnover or asset thresholds apply. Any transaction where at least one party operates in two or more COMESA Member States may be notifiable (however, see below on Article 3(2) of the Regulations); ● mandatory filings to the CCC must be made within 30 days from the decision to merge. Failure to notify results in the transaction being unenforceable in the COMESA region; ● a filing fee is payable based on the lower of: 1) $500,000; or, ii) 0.5% of whichever of the parties’ combined annual turnover or combined asset value in the COMESA region is higher; ● according to the legislation, “all parties to the merger are obliged to individually submit a notification to the CCC with the exception of a hostile bid where only the acquiring party must submit a notification”. On a strict reading, each party would therefore be required to submit a filing and pay the full filing fee. However, in its draft guidelines, the CCC has adopted a more lenient interpretation and in practice will accept joint notification or notification from either party and payment of a single fee in respect of that filing. There can be an agreement between the parties as to how to split the fee; ● while there is some discussion around this point, it seems that once the parties notify a transaction they do not have to suspend it pending the CCC’s approval; ● the CCC has 120 days to review a notified transaction but it can request an extension; ● the substantive review takes into account competition and public interest grounds. The regime was heavily criticised from the beginning, which led COMESA to publish draft Merger Assessment Guidelines in April 2013. While these guidelines did provide some clarification, a number of issues remained unresolved. The main points of criticism are the thresholds being set at zero, the low degree of local nexus required, the high filing fees and the ambiguity as to whether the regime constitutes a “one-stop shop”, replacing the need for filing in each of the member states. In response to these criticisms, the CCC, in collaboration with the International Finance Corporation of the World Bank, has engaged a consultant to review the merger provisions of the Regulations, including the zero thresholds, local nexus, effect on competition (see below on Article 3(2) of the Regulations), one-stopshop, and filing fees. In this regard, a first workshop discussing the suggested amendments took place in April 2014, and a second one is expected to be held over the summer. The first workshop focused on finalising the draft Merger Assessment Guidelines and in particular the interpretation of Article 3(2) – see below. The CCC’s intention is to finalise the draft Merger Assessment Guidelines after the second workshop, and eventually issue additional Guidelines. These are obviously encouraging steps, but the CCC has also taken informal steps to make its regime more pragmatic with immediate effect. Specifically, the CCC has used Article 3(2) of the Regulations, which provides that the COMESA merger rules apply only to transactions “which have an appreciable effect on trade between Member States and which restrict competition in the Common Market”. The absence of turnover thresholds could have led to the interpretation that all mergers in which either or both of the parties generates turnover in two or more COMESA members states would be caught by Article 3(2). But this is not the interpretation that the CCC has adopted for parties that decided to approach the CCC to find a practical solution for a transaction which lacked sufficient nexus with COMESA and did not restrict competition. In fact, we understand that the CCC has issued 5 “comfort COMESA New developments in the COMESA merger control regime – on the path to maturityACER Quarterly January 2014 – May 2014 23 letters”, including one for one of our clients, which in essence exempted the transactions from the need for a complete notification, and therefore from the payment of the high filing fees. The basis for these “comfort letters” was the absence of appreciable effect on trade between COMESA Member States and the absence of any restriction of competition in the COMESA Common Market. In practice, a three-step process was followed: ● the parties (or one of them) sent an informal letter to the CCC explaining that they/it considered that the COMESA merger rules did not apply because the proposed transaction did not meet the requirements of Article 3(2) of the Regulations; ● the CCC invited the parties (or the party) to submit a “bare bones” filing to enable it to assess whether the requirements of Article 3(2) of the Regulations were met (the “bare bones” filing was not accompanied by any filing fees); ● on the basis of such a “bare bones” filing, the CCC issued a “comfort letter” exempting the proposed transaction from a complete notification, and therefore from the payment of any filing fee. It is important to note that the assessment whether the requirements of Article 3(2) of the Regulations are met is one that can only be made by the CCC itself. The CCC has explicitly stated that any unilateral self-assessment by the parties or their lawyers of whether the requirements of Article 3(2) are met is therefore not permitted. This is a welcome and pragmatic clarification of the applicability of the COMESA merger control rules. It is indicative of an approach by the CCC of encouraging companies doing business in the region to engage constructively with COMESA’s merger control regime, rather than to seek ways of avoiding it. Hopefully, this informal process will be “codified” with the on-going review procedure, which will also resolve the other ambiguities of this newly operational merger control regime, which seems to be progressively maturing. n Dimitris Vallindas Senior Associate, Brussels T +32 2 505 0974 dimitris.vallindas@hoganlovells.com24 ACER Quarterly January 2014 – May 2014 On 20 March 2014, China’s Ministry of Commerce (“MOFCOM”) issued a brief press release. The release said that, from May 1 onwards, the authority will make public on its website all decisions resulting in a finding that a company has failed to notify a merger in breach of the Anti-Monopoly Law (“AML”). The merger control regime in China has now been in force for over five years. Many of its key elements are relatively straight-forward: if a reportable transaction meets the relevant sales revenue thresholds, a notification must be filed with MOFCOM – and MOFCOM’s approval must be obtained – before the transaction can be implemented. If a reportable transaction is closed without MOFCOM approval, then the “notifying party(ies)” of the transaction breach(es) the AML. If MOFCOM concludes that, indeed, a breach has occurred, it can impose sanctions on this(ese) party(ies). In particular, MOFCOM can impose a fine of up to RMB 500,000, and is empowered to order the transaction to be unwound. But perhaps the biggest risk for companies which fail to meet their AML notification obligations is the threat of being publicly ‘named and shamed’ if the infringement decision is made public. In that past, MOFCOM has reportedly investigated – and sanctioned – several companies for failing to file reportable transactions. However, none of these decisions was made public. Now, the press release of 20 March appears to send a clear signal: the ‘honeymoon period’ is over, as MOFCOM plans to step up enforcement activities. Just to reinforce the point, MOFCOM included a dedicated fax number inviting whistle-blowers to report transactions that were not notified in breach of the law in the text of the press release. With over five years of enforcement experience behind it, MOFCOM seems to have gained in confidence and to be ready to set new priorities and enforcement goals. Enforcement against transactions that were not notified in breach of the law seems to be one of these priorities. n MOFCOM signals tougher stance on non-reported M&A deals Adrian Emch Partner, Beijing T +86 10 6582 9510 adrian.emch@hoganlovells.comACER Quarterly January 2014 – May 201426 ACER Quarterly January 2014 – May 2014 In February 2014, China’s Ministry of Commerce (“MOFCOM”) enacted the Interim Regulation on the Standards Applicable to Simple Cases of Concentrations between Business Operators (“Simple Cases Regulation”). This regulation sets out the types of transactions that qualify as “simple cases,” as a first timid step towards a simplified, fast-track merger control procedure. MOFCOM has recently been drafting implementing rules for the Simple Cases Regulation. On 18 April, MOFCOM made the second step towards a fasttrack procedure by issuing the Guiding Opinions on the Notification of Simple Cases of Concentrations between Business Operators (Trial) (“Guiding Opinions”) and its two annexes, the simplified notification form and the ‘public notice’ template (collectively, the “Implementing Rules”). The new rules took effect from the date of publication. Simplified regime The simplified notification form, as part of the Implementing Rules, will allow merging parties to provide fewer documents and less information when filing a merger control notification. Several sections which appear in the standard notification form were deleted in the simplified notification form. Time savings? The Implementing Rules also provide for a shorter timeline: as in other jurisdictions, the Chinese simplified merger system appears to be aimed at reducing the merger review processing period. In particular, the new system provides for a period of public consultation by way of ‘public notice,’ whereby MOFCOM issues the basic details of the transaction filed on its website and invites all interested parties to comment. The Guiding Opinions stipulate that the public notice will be uploaded after ‘case acceptance,’ and third parties will have 10 days to comment. In principle, the issuance of the public notice and comment opportunity should allow MOFCOM to short-circuit the (sometimes lengthy) one-on-one consultations with individual stakeholders on a typical standard filing. However in terms of hard law, there are no specific, shorter timelines in place as a result of the Implementing Rules. In addition, there is no obligation on MOFCOM to issue the public notice within a specific deadline after case acceptance. Hence, a “simple case” may still enter into “phase 2” of the merger control procedure. Furthermore, the phase between filing the (simplified) notification and case acceptance may still be relatively lengthy, mainly as a result of the shortage of manpower within MOFCOM for dealing with this part of the procedure. In short, it may be too early to qualify the new Implementing Rules as a true “fast-track” procedure. Only future MOFCOM practice will confirm whether “simple cases” will indeed consistently be cleared earlier on in the process as compared to a standard filing. “Simple case” application rejected, or revocation – back to square one The principle on which the Implementing Rules are based is that the merging parties need to assess whether their transaction qualifies as a “simple case” and will assume the consequences of that assessment. The Guiding Opinions state that the parties themselves must apply for “simple case” status. The Simple Cases Regulation stipulates that the following types of transaction can be treated as ‘simple cases’: ● in a horizontal merger, if the combined market share of all parties involved is below 15%; ● in a vertical merger, if the parties’ market share in the upstream or downstream is below 25%; ● in a conglomerate merger, if the parties’ market share in any market is below 25%; ● in the establishment of an off-shore joint venture, if the joint venture does not engage in any business in China; ● in the acquisition of equity or assets of off-shore entities, if the target does not engage in any business in China; and ● where an exit is made from a joint venture by one or more of its shareholders, and the number of controlling shareholders of the joint venture is reduced. However, the Simple Cases Regulation and the Guiding Opinions also provide the basis for MOFCOM to reject the application for “simple case” status, or to revoke this status. One reason that would cause MOFCOM to do this is a grounded complaint by a third party within the 10-day period for comment after the public notice. Next step towards a simplified, fast-track merger procedure in ChinaACER Quarterly January 2014 – May 2014 27 If that scenario materializes, the merging parties do not only lose “simple case” status, but are also obliged to re-file the notification. Unless MOFCOM ends up doing things differently in practice, this may raise the possibility of the merging parties having to start the process from scratch and go through the relatively lengthy pre– acceptance phase again. In other words, there remains a risk that, if the “simple case” application is not accepted or the status is subsequently revoked, the entire merger process could take longer than a standard process. Increased transparency In general, MOFCOM’s recourse to the public notice process will increase the transparency of merger control procedures in China. Up to now, MOFCOM’s consultations with third parties have tended to focus more on domestic stakeholders, since MOFCOM reached out primarily to other Chinese governmental bodies and industry associations which tend to be dominated by local market players. Henceforth, the public notice system will make information on notifications submitted to MOFCOM accessible to all, in real time. Conclusion The Simple Cases Regulation and the Implementing Rules are an important building block in establishing a simplified regime for so-called “simple cases” in China. If implemented properly, there will be time savings and efficiencies in terms of lower document requirements as compared to a standard merger control notification. The public notice process will replace the one-onone consultations, but it is not clear whether many parties will be willing to assume the risk of applying for “simple case” status; the worst-case scenario would be obtaining and then losing “simple case” status, which might lead to a second pre-acceptance phase. It is encouraging to see MOFCOM bringing this new level of sophistication to the five-year old merger control regime. However, only time will tell whether MOFCOM will allocate the resources and develop the internal expertise to turn the simplified regime into a true ‘fast-track’ process: one that genuinely cuts red tape and reduces the high administrative burden for businesses filing merger notifications in China. n Sherry Hu Associate, Beijing T +86 10 6582 9597 sherry.hu@hoganlovells.com28 ACER Quarterly January 2014 – May 2014 The New York Attorney General’s (NYAG) office has announced that it has reached a settlement with two generic drug manufacturers regarding allegations that an agreement between the firms not to challenge each other’s eligibility for regulatory exclusivity was anticompetitive. Although not a traditional reverse payment patent settlement agreement between branded and generic drug companies, the settlement reflects a move by antitrust enforcers to apply reverse payment case law and principles to a broader range of agreements in the pharmaceutical space in the wake of FTC v. Actavis. Interestingly, the case was brought by the NYAG alone; the FTC, which is typically very active and aggressive on these matters, was not part of the settlement. Background The settlement resolves an investigation by the NYAG into a 2010 agreement between Ranbaxy Pharmaceuticals, Inc. (Ranbaxy) and Teva Pharmaceuticals USA (Teva) related to atorvastatin calcium, the generic version of Lipitor®. In 2002, Ranbaxy was the first generic drug company to file an Abbreviated New Drug Application (ANDA) to market atorvastatin calcium. It was expected to be eligible to enjoy the 180-day exclusivity period that is generally granted to the first generic drug company to file an ANDA for a branded product coming off of exclusivity. Teva and other generic drug companies also filed ANDAs for atorvastatin calcium. Although Pfizer, the maker of Lipitor, sued Ranbaxy, Teva, and other ANDA filers for alleged infringement of the atorvastatin calcium patents, that litigation settled and Ranbaxy received a license to market atorvastatin calcium. The license permitted Ranbaxy to enter the market in late November 2011, and Ranbaxy’s first-filer exclusivity would have lasted until late May 2012. However, before Ranbaxy’s ANDA was approved, the FDA suspended its substantive review of the ANDA due to concerns about some of the data underlying its application. Because of this delay, Ranbaxy was concerned that it would not be prepared to enter the market as of the date on which the Pfizer license was to commence. In the face of this risk, Ranbaxy approached Teva and reached an agreement under which Teva would launch its generic atorvastatin drug in place of the Ranbaxy product and the two firms would split the profits. The agreement also contained another provision, however, which was unrelated to generic atorvastatin and served as the focus of the NYAG’s scrutiny. The provision provided that for a period of at least two years neither Ranbaxy nor Teva would “challenge the other Party’s right to First to File Exclusivity for any ANDAs filed as of the Effective Date, or the viability, completeness or status of any ANDAs, filed with FDA as of the Effective Date.” Assuming Ranbaxy or Teva entered the market in November 2011, the agreement would last until May 2014, and Ranbaxy did indeed enter in November 2011. Under the terms of the settlement reached with the NYAG, the parties agreed to pay the state US$300,000 and terminate the agreement. Analysis In its findings, the NYAG explicitly analogized the socalled “No-Challenge” provision to a reverse payment patent settlement because, according to the NYAG, “the effect of a successful challenge to a [Sole First Filer Exclusivity] is not unlike the effect of a successful challenge to a brand manufacturer’s patent–faster and greater entry of multiple generic competitors, leading to faster and greater price reductions.” The core theory of harm reflected in the NYAG’s findings and its announcement of the settlement – namely, that the agreement served only to protect each firm’s market position and reduce the risk that either would be deemed ineligible for first-filer exclusivity – is strongly reminiscent of language in the U.S. Supreme Court’s recent ruling on reverse payment patent settlements in Actavis. In Actavis, Justice Breyer, writing for the majority, described the competition concern in that context arising because a patentee was using its monopoly profits to “prevent the risk of competition.” (emphasis added) Although the NYAG’s analysis relies heavily upon Actavis and other principles that have been applied in the context of traditional reverse payment patent settlements, the settlement also suggests that the NYAG is looking to push beyond the bounds of Actavis. Specifically, in its findings the NYAG also analogizes the No-Challenge provision to “an agreement between competitors to divide markets,” which if not per se illegal, is at a minimum “inherently suspect under the antitrust laws and would be presumed unlawful NY Attorney General forges new ground in scrutiny of pharmaceutical agreements with first-filer exclusivity no-challenge settlement ACER Quarterly January 2014 – May 2014 29 by a court.” In Actavis, the Supreme Court explicitly declined to adopt the position advanced by the FTC in that case that reverse payment patent settlements should be presumptively unlawful and subject only to “quick look” rule of reason analysis. The NYAG also considered whether the No-Challenge provision was reasonably necessary to facilitate the sharing of confidential information in furtherance of the atvorastatin arrangement, and therefore a lawful ancillary restraint to an otherwise pro-competitive agreement. The NYAG ultimately concluded that it was not for three primary reasons: ● the parties only needed to share a limited amount of confidential information in order to carry out the atorvastatin arrangement and other provisions contained in the agreement were sufficient to address these concerns; ● the No-Challenge provision was not “narrowly tailored to address any legitimate confidentiality concerns” because the No-Challenge provision covered a broad range of drugs and prohibited any and all challenges, regardless of the legal or factual basis; and ● the parties could have used a less restrictive means to address any confidentiality concerns (e.g., firewalls). Conclusion Although the specific type of agreement at issue here is likely to be rare, the analytical framework applied by the NYAG is potentially applicable to countless types of other agreements entered into by branded and generic drug companies alike. In particular, in the event this approach is adopted by other antitrust enforcers such as the FTC or other state attorneys general, it could usher in scrutiny of agreements that have not previously been a primary focus of regulators and private plaintiffs. Thus, it remains important to carefully consider the antitrust implications of any agreement in the pharmaceutical space relating to the timing of generic entry into the market. n Robert F. Leibenluft Partner, Washington T +1 202 637 5789 robert.leibenluft@hoganlovells.com Lauren Battaglia Associate, Washington T +1 202 637 5761 lauren.battaglia@hoganlovells.com30 ACER Quarterly January 2014 – May 2014 Recently, a federal judge in the U.S. District Court for the District of New Jersey held that only patent settlements involving a reverse monetary payment will be subject to antitrust scrutiny under the framework articulated by the Supreme Court last year in FTC v. Actavis. In affirming its earlier ruling dismissing the direct purchaser complaint, the court held that nothing in Actavis altered the conclusion it had reached previously under the U.S. Court of Appeals for the Third Circuit’s ruling in In re K-Dur Antitrust Litigation that the settlement did not, in fact, contain a reverse “payment” because there was no transfer of money between the parties. This most recent development in the ongoing debate regarding these agreements is significant not only because it is the latest effort by the courts to clarify and develop the framework put in place under Actavis but also because it constitutes a departure from other recent district court rulings that have suggested that Actavis may apply to non-monetary forms of compensation. Background The agreements at issue in the case settled patent litigation between GlaxoSmithKline (GSK) and Teva Pharmaceuticals (Teva) related to GSK’s drug, Lamictal, which is used to treat epilepsy and bipolar disorder and is available in chewable and tablet forms. Under the terms of the agreement, Teva was permitted to sell generic chewables approximately 37 months prior to expiration of the relevant patent and generic tablets approximately six months prior to patent expiration. GSK also granted Teva an exclusive license to the relevant Lamictal patent, which was exclusive even as to GSK during Teva’s first-filer exclusivity period. The result of this provision was that GSK would not compete with Teva through marketing of an Authorized Generic version of Lamictal in either chewable or tablet formulations during that period of time. The opinion In the ruling, Judge William H. Walls held that Actavis articulated what was effectively a three-part test –“two steps to determine when to apply the rule of reason, followed by an application of the rule of reason” to the particular circumstances. First, the court must determine whether there is a reverse payment. Second, the court must determine whether that reverse payment is large and unjustified. Third, the court must apply the rule of reason, guided by the five considerations set forth by the Supreme Court in Actavis. According to Judge Walls, the first step of the analysis – whether an agreement involves a reverse payment –“hinges on what the parties exchanged in the settlement and must include money.” Although stopping short of arguing that the ruling in Actavis explicitly decided the issue, Judge Walls identified numerous portions of the majority opinion referencing monetary payments and stated that “[b]oth the majority and dissenting opinions reek with discussion of payment of money.” The opinion mentions, in particular, Chief Justice John Roberts’ dissent in Actavis, which Judge Walls characterized as including a critique of “the majority precisely because it drew a line between monetary and non-monetary payments.” Thus, according to Judge Walls, even Chief Justice Roberts in dissent read the majority opinion as only addressing monetary reverse payments. Interestingly, Judge Walls also relied upon the reasonableness of the agreement at issue – in particular, the fact that Teva was allowed early entry, that there was no monetary payment, and the brief duration of the exclusive license as to GSK – as further evidence that it was “not of the sort that requires Actavis scrutiny.” Thus, the particular factual circumstances presented in the settlement agreement at issue in Lamictal may have also played a role in Judge Walls’ view as to the need for antitrust scrutiny of settlements involving non-monetary forms of compensation. Other recent decisions In the opinion, Judge Walls also addresses other recent rulings regarding pharmaceutical patent settlements, specifically In re Lipitor and In re Nexium, which have suggested other interpretations of Actavis. In Lipitor, another federal district court in New Jersey granted plaintiffs leave to amend their complaint in light of Actavis to include allegations of non-monetary forms of payment. In allowing the amendments, Judge Peter G. Sheridan declined to decide the substantive question as to the scope of Actavis, but noted that “nothing in Actavis strictly requires that the payment be in the form of money … .” According to Judge Walls, this was unpersuasive because the ruling did not in fact decide the issue and thus was “more like a request for further briefing than a decision.” Federal judge limits antitrust scrutiny of pharmaceutical reverse payments to settlements involving monetary transfersACER Quarterly January 2014 – May 2014 Judge Walls also distinguished as dictum a case from federal district court in Massachusetts, Nexium, where Judge William G. Young, similar to Judge Sheridan, held that “[n]owhere in Actavis did the Supreme Court explicitly require some sort of monetary payment … to constitute a reverse payment.” Moreover, according to Judge Young, “[a]dopting a broader interpretation of the word ‘payment’… serves the purpose of aligning the law with modern-day realities.” In addition to being dicta because a cash payment was also alleged in the case, Judge Walls noted that in Nexium the court had also found that scrutiny was appropriate because each of the settlements was “either ‘outsize’ or ‘entirely disconnected’ from the dispute over the Nexium patents,” which was not the case in Lamictal. Conclusion We are still in the early days of trial courts answering the Supreme Court’s call in Actavis for them to tailor the specific rule of reason analysis “so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper antitrust analysis, and, on the other, consideration of every possible fact or theory irrespective of the minimal light it may shed.” The split reflected in these cases confirms that not only is this is not the last word on the issue of the definition of “reverse payment” but also more broadly serves to highlight that debate regarding this and other key threshold issues in this space remains fierce and subject to rapid developments. n Robert F. Leibenluft Partner, Washington T +1 202 637 5789 robert.leibenluft@hoganlovells.com Lauren Battaglia Associate, Washington T +1 202 637 5761 lauren.battaglia@hoganlovells.com32 ACER Quarterly January 2014 – May 2014ACER Quarterly January 2014 – May 2014 33 Competition law implementation approaches in Hong Kong The Competition (Amendment) Bill 2014 (“Bill”) was published in the official gazette on 9 May 2014. The Bill is yet another step in the process of implementation for the Hong Kong Competition Ordinance (“Ordinance”), which was enacted in June 2012. Parts of the Ordinance are already in force, namely those relating to the establishment of the Competition Commission and the Competition Tribunal (“Tribunal”). The Bill tables the provisions necessary for the full operation of the Tribunal as a superior court of record with primary jurisdiction to hear and adjudicate competition-related cases, before the Ordinance comes into full effect – now expected to be in 2015. The Bill will have its first reading in the Legislative Council on 14 May, and few objections are expected to be raised. Key amendments The Bill endows the Tribunal with all the powers, rights and privileges of the Court of First Instance (“CFI”), including: ● the power to make orders prohibiting persons from leaving Hong Kong; ● the power to award simple interest on debts and damages for which judgment is given and to provide that judgment debts are to carry simple interest; ● provision for the payment of penalties and fines imposed by the Tribunal to be enforced by the Tribunal in the same manner in which a judgment of the CFI may be enforced; ● provisions regarding the Tribunal’s registrars, their jurisdiction and powers, and the privileges and immunities they enjoy; ● the power for members of the Tribunal to order the reimbursement of expenses incurred by witnesses by reason of their attendance at the proceedings; ● miscellaneous consequential amendments to other Ordinances. Comments Since the Ordinance was enacted in June 2012, the authorities have pursued a step-by-step approach in putting into effect the rules and laying out the detailed substantive and procedural framework for the future enforcement activities. The Bill is yet another step towards implementing Hong Kong’s competition law regime in full. The Bill is also a reminder that the enforcement regime for the Ordinance is a ‘mixed system,’ with both an initial administrative law procedure followed by a litigation process. Businesses and their lawyers will need to engage in a cooperative, multi-disciplinary preparation effort as early as possible before the prohibitions in the Ordinance are enforced with vigour. n Laura Patrick Senior Associate, Hong Kong T +852 2840 5978 laura.patrick@hoganlovells.com34 ACER Quarterly January 2014 – May 2014 France Reduction of fine in the Bang & Olufsen case On 13 March 2014, the Paris Court of Appeal confirmed the decision rendered in December 2012 by the French Competition Authority fining Bang & Olufsen (B&O) for banning de facto resellers of its selective distribution network from internet sales. Mirroring the Pierre Fabre ruling, the Court of Appeal confirmed the existence of a restriction by object and ruled out the possibility of individual exemption under Article 101(3) TFEU as B&O was found to have imposed “restrictions that were not indispensable to the running of an efficient network”. The Court of Appeal, however, reduced the sanction from €900 000 to €10 000, as the Authority should have taken into account the legal uncertainty at the time as to the ban of internet sales when assessing the gravity of the infringement. Damages granted in the lysine cartel On 27 February 2014, the Paris Court of Appeal granted in a follow-on action compensation amounting to €1.66 million to the poultry producer Doux for damages it had suffered as a result of Ajinomoto Eurolysine’s participation in a cartel in the lysine sector. Applying the passing-on defence theory enshrined by the French Supreme Court in June 2010, the Court of Appeal considered that Doux had not passed the increase in prices on to its clients, and thus on to consumers. n Germany German Court dismisses CDC damages claim On 17 December 2013, the Regional Court of Düsseldorf (Landgericht Düsseldorf) dismissed a follow-on damage claim brought by the Belgian company Cartel Damage Claims S.A. (“CDC”) against six members of the German cement producers’ cartel. CDC had acquired the claims of several cement purchasers for a fixed fee of EUR 100 and agreed to share between 65% and 85% of the amount of damages obtained. The Court held that the transfer of the claims to CDC was invalid because firstly, the assignments prior to June 2008 violated the German Legal Consultation Act (Rechtsberatungsgesetz) which prohibited the commercial collection of third party claims without a respective license, and secondly, because CDC’s business model violated public policy by shifting the financial risk of litigation to the cement producers without taking any risk of loss on its own. According to German Civil Procedure Law, the defeated party has to pay the court fees as well as the winning party’s costs (including lawyers’ fees). However, as the CDC “vehicle” was only minimally funded, it would never be able to cover the costs in the event of losing the lawsuit. First Ever Antitrust Extradition to US On 4 April 2014, the U.S. Department of Justice (DoJ) announced the first ever extradition from Germany on antitrust charges. The former executive of Parker ITR Srl, a marine hose manufacturer headquartered in Northern Italy, was arrested in Germany on 17 June 2013. On 3 April 2014, he was transferred in custody to Florida. He is accused of price fixing, market sharing and bid rigging from 1999 to 2006 in the market of marine hoses, a flexible rubber hose used to transfer oil between tankers and marine terminals. The Italian national is now in danger of being sentenced for up to 10 years of prison and of receiving a criminal fine of USD 1 million. It has been reported that the Italian national complained to the European Commission against his extradition from Germany by arguing that Germany violated EU rules, namely the guarantee of free movement of business people and the prohibition of discrimination on the ground of nationality. The complaint concerning free movement has been rejected by the European Commission, but the discrimination complaint is still being examined. There are no criminal penalties for breaching competition law under German law, except for bid rigging. This extradition is in line with the increasing criminalization of cartels both internationally and in Germany. n Italy Italy’s Council of State upholds dominance-abuse decision against Coop Estense. Italy’s Supreme Administrative Court has annulled a judgment from Rome’s Administrative Court, which overturned an antitrust decision on an abuse of market power by Coop Estense against Esselunga, two leading companies active in the mass retail field. The court said Coop Estense had tried to stop Esselunga opening two supermarkets in the province of Modena and this was illegal. The court also confirmed the original fine of 4.6 million euros. Round-up of national developmentsACER Quarterly January 2014 – May 2014 35 ICA closes antitrust investigation into railway market following commitments In March 2014, the Italian Competition Authority (ICA) closed its antitrust investigation into suspected market abuse by six units of Ferrovie dello Stato, following commitments made by one of the subsidiaries. In its final decision, the ICA stated that the submitted commitments were strong enough to give rival operators access to Italy’s railway infrastructure and market for high-speed passenger transport. Abuse of dominance in cellulosic-waste markets. In March 2014, the Italian Competition Authority (ICA) imposed a fine of around 1.9 million euros on HERA, and on its subsidiary, Herambiente, for abusing its market position regarding waste-paper collection in the Italian region of Emilia Romagna. The practice allegedly blocked rivals’ access to cellulosic waste from urban waste collections. In addition, the ICA imposed a commitment on HERA requiring HERA to submit to the ICA documentation relating to the next tendering procedures for the disposal of waste cellulosic. n Poland Commitment decision on polish gas market In January 2014, the Polish Competition Authority (PCA) issued a commitment decision which requires Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) to amend its model contract and to offer its business partners annexes removing all clauses which restrict the resale of the gas. The PCA had concerns that PGNiG might be abusing its dominant position and hindering the liberalization of the gas market. Conditional merger clearance for acquisition of hypermarkets In January 2014, the Polish Competition Authority (PCA) issued a merger clearance decision for Auchan’s purchase of Real’s hypermarkets subject to commitments to sell certain hypermarkets. During its investigation, the PCA carried out market research into the substitutability of different types of large retail store (discount stores, supermarkets, hypermarkets). In the PCA’s view, there is asymmetry of competition: discount stores and supermarkets do not exert competitive pressure on hypermarkets, while hypermarkets exert pressure on discount stores and supermarkets. The PCA, therefore, established two markets: the market of hypermarkets and the market of discount stores and supermarkets. The PCA held that the market of retail in hypermarkets has a local scope with hypermarkets operating within a market encompassing a radius of 20 or 25 minutes of car drive competing with each other. n Russia First extra-territorial cartel case On 26 February 2014, the Commission of the FAS (the case hearing body of the Russian Competition Authority) found two foreign companies Uzmobile and Rubicon Wireless Communication, which are both registered Uzbek telecom operators, in breach of section 11(1)(4) of the Russian Competition Law (No135-FZ of 26 July 2006) which prohibits agreements between competitors aimed or having the effect of the reduction of output or the discontinuation of production. While this case is part of a larger corporate and commercial dispute between Russian and Uzbek telecom operators, it is the first time that the FAS has tested its powers to investigate and prosecute international cartels formed totally abroad but having a negative impact on the Russian market. Automobile market inquiry The FAS is set to make an inquiry into the automobile market (passenger vehicles) later this year. This is part of an on-going effort to make the automobile market more transparent and to eliminate restrictive practices between car makers, dealers and distributors. The previous inquiry into the practices in the automotive market aimed primarily at the sales and spare parts supply chain and ended in a Code of Conduct being signed by all major carmakers. The current inquiry is expected to be very broad, and will include some industry specific tests for geographic and product market definition. All interested parties are invited to participate and submit their comments. n South Africa The costs of competition litigation The merger between Pioneer Hi Bred International Inc and Pannar Seed (Pty) Ltd resulted in the Constitutional Court of South Africa passing judgement on an issue unrelated to the effects of the merger, but rather in relation to a costs order granted against the Competition Commission.36 ACER Quarterly January 2014 – May 2014 In a unanimous judgment the Court held that the Competition Appeal Court (“the CAC”), as an appellate court, was empowered only to review and consider appeals from decisions of the Tribunal. Its power to award costs in Tribunal proceedings extended no further than those of the Tribunal and thus it is not empowered to make adverse cost orders against the Commission. It also held that the Tribunal (and by extension the CAC) could only make an award of costs against the Commission where it was found to have acted maliciously or in bad faith. In regard to proceedings before the CAC itself, the Court held that the CAC has the power to order costs against the Commission, but that such power is limited by the Act. n UK Time limits for damages claims On 9 April 2014, the Supreme Court allowed an appeal by Morgan Advanced Materials plc (formerly Morgan Crucible) relating to damages claims following the 2003 European Commission carbon and graphite products cartel decision. The Supreme Court concluded that a European Commission decision establishing an infringement of Article 101 TFEU constitutes in law a series of individual decisions addressed to its individual addressees. The only relevant decision establishing infringement in relation to an addressee who does not appeal is the original Commission decision. Any appeal against the finding of infringement by any other addressee is irrelevant to a non-appealing addressee. Therefore, the two year time period for the claimants to bring their actions against Morgan began to run in February 2004, when the time for Morgan to appeal expired. It was not relevant that there were appeals by other addressees against the infringement decision. Accordingly, the damages action against Morgan, which was not brought until December 2010, was out of time. Recommended retail prices On 27 March 2014, the OFT (as it then was) issued a decision finding that a manufacturer of mobility scooters and eight of its UK-wide online retailers have infringed the Chapter I prohibition of the Competition Act 1998. The OFT found that the parties entered into agreements, or engaged in concerted practices, that prevented the UK-wide online retailers from advertising online prices below the manufacturer’s recommended retail price for certain of its models of mobility scooter. The OFT has not imposed fines as the parties’ turnovers fell within the thresholds for immunity from fines for “small agreements” under section 39 of the Competition Act 1998. However, the OFT has directed the parties to bring the arrangements to an end and to refrain from entering into the same or similar arrangements in the future. n United States White House announces “major progress” on patent issues On 20 February 2014, the White House updated its plans to combat “patent trolls,” foster innovation, and improve the U.S. patent system. The Obama administration announced three new executive actions and again called on Congress to pass patent reform legislation, while also declaring “major progress” toward achieving plans it laid out in a June 2013 initiative. This week’s announcement is the latest effort by the White House to make it more difficult for frivolous litigation to hamper American innovators and consumers. The new executive actions each involve plans to strengthen the quality of U.S. patents. The White House calls on the U.S. Patent and Trademark Office (PTO) to launch an initiative described as “crowdsourcing prior art,” which aims to improve the ability to identify prior art so that patent examiners can more easily determine whether an invention is truly novel. In addition, the PTO will further expand its technical training of patent examiners and encourage pro bono and pro se assistance of inventors. With proponents of patent reform arguing that weak patents encourage abusive and anticompetitive litigation tactics, these initiatives are an attempt to prevent additional weak patents from being issued in the first place. While the June 2013 initiatives are ongoing, the White House declared it has already delivered on several commitments. For one, the PTO will soon issue a final rule requiring increased transparency of ownership for parties involved in proceedings before the PTO. To counter the patent trolls that have sued “main street” retailers, the PTO will launch an online toolkit to help consumers and small businesses understand their rights and the risks and benefits of litigation or settlement. In general, the press release suggests the White House will remain aggressive in challenging alleged abuses of the patent system and will ACER Quarterly January 2014 – May 2014 37 continue to look for ways to undermine the potential anticompetitive effects of patent assertion entities. n38 ACER Quarterly January 2014 – May 2014 Competition and EU law planner The Competition and EU law Planner is a service and publication entirely free of charge. For further details please contact us at: www.eucompetitionevents.comACER Quarterly January 2014 – May 2014 39 We have developed a customizable competition law compliance e – learning, testing and risk management programme, providing awareness level training for all company employees. COMPETE is based on state – of – the – art, tried and tested online training solutions with high customer satisfaction. The 75 minute, learner paced, electronic multi-media programme allows a company to deliver awareness level training for all employees, including those whose roles may put them into a position that places the company at a heightened risk of a competition law infringement. The programme can be customized to reflect the identity of the company, including branding, sector and company specific case studies and content. The programme is available in a variety of languages, including French, German, Spanish, Italian, Polish and Portuguese. Key features of COMPETE ● Easily navigable ● Opening teaser ‘story’ brings the program to life ● Interactive training techniques ● Practical scenarios present learners with real life situations ● Focused case law summaries provide real life examples ● Practical guidelines available for learners to print ● Expandable “learn more” sections providing richer content ● Talking heads provide additional narrative excerpts adding to the multi – media experience and authenticity of content ● Q&A test at the end of the course with feedback on the answers ● Options for filtered business reports and tracking systems. We would be happy to discuss your needs in more detail and to arrange a demonstration.

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